Consumer Prices Fall In March - April 16, 2013

Much like last Friday’s companion report from the U.S. Department of Labor on producer (wholesale) prices, this morning’s release of consumer prices for the month of March made for another tame reading on inflation. Specifically, the report showed that the Consumer Price Index was down 0.2% on a seasonally adjusted basis last month.

A closer look reveals that the primary reason for the benign reading in prices was a decline in gasoline costs. Indeed, the energy index fell 4.4% in March, which was a stark contrast to the sharp (+9.1%) increase for the energy metric in February. Meanwhile, the food index was unchanged, as an increase in the index for food away from home was offset by a decline in the food index at home. The index for all items, excluding the volatile energy and food components, rose a nominal 0.1%. That compared favorably to the still modest respective increases of 0.2% and 0.3% recorded in February and January. Overall, the 12-month change in the index for all items was 1.5% in March.

The latest benign reading on inflation is also below the Federal Reserve’s target level. Thus, the central bank should have no problem continuing its aggressive monetary actions in an effort to stimulate the economy. The Fed’s dual mandate calls for stable prices—which is certainly the case right now—and maximum employment. The latter issue is still a major concern, which is keeping the Fed active in both mortgage bonds and Treasuries markets. On several occasions, Chairman Ben Bernanke has said that the lead bank will continue its bond-buying program until a “sustained improvement in the labor market” is achieved. If nothing else, the latest tame reading on inflation puts no pressure on the Federal Reserve to raise interest rates. The central bank plans to keep rates at their current level for the foreseeable future, perhaps even until the early stages of 2015.

All in all, the latest reading on consumer prices shows that inflation is not a major issue right now for the central bank. This data, along with today’s solid report on housing starts and building permits, are welcomed news, especially with the recent string of uninspiring reports on the U.S. economy, including data on the labor market, retail sales, and manufacturing and nonmanufacturing activity. Later this morning, the latest data on industrial production will be released, while tomorrow will bring the Federal Reserve’s latest Beige Book summation of economic conditions.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.